Accounting for Paycheck Protection Program (PPP) Loans and Forgiveness
The SBA’s Paycheck Protection Program (PPP) was designed to aid small businesses in withstanding the unprecedented impacts of the COVID-19 pandemic. A number of questions still remain with regard to the program, including specific details related to forgiveness as well as accounting and financial reporting considerations. Editor’s Note: The SBA released its PPP Loan Forgiveness Application on Friday, May 15th.
Currently, there is no formal guidance that speaks to how businesses should account for PPP loan funds and forgiveness. However, there are similar applications and best practices within U.S. GAAP that businesses can take into consideration until such a time when further guidance is provided.
Accounting for PPP Loans
During the 8-week covered period of the loan, no principal payments are required. Qualifying expenses — payroll costs, mortgage/rent payments, utilities, etc. — should be recognized through the income statement.
Businesses who’ve received PPP loans should amortize capitalized, incremental debt issuance costs generally over the life of the loan under the effective interest method. Examples of these costs may include fees to advisors, legal counsel or other costs directly related to PPP funding but not otherwise reimbursed under the loan terms. Additionally, although interest and principal payments are deferred for six months, interest should still be accrued at the stated rate on a monthly basis.
While it is possible this interest will ultimately be eligible for forgiveness, we recommend businesses follow traditional accounting methods until such guidance has been formally announced.
General best practice indicates most businesses should treat PPP loans as debt given that they are provided by the government and are contingent upon certain criteria — in this case, using the funds for payroll, rent and other business expenses.
ASC 470-50 directs businesses not to extinguish the debt until the company has been legally released from the debt, or, in other words, the loan has been forgiven. PPP borrowers must formally apply for loan forgiveness, and once that process has been completed and the borrower’s debt instrument has been extinguished, the business would be able to derecognize the related income on the balance sheet. Editor’s Note: The SBA released its PPP Loan Forgiveness Application on May 15th. Additional details and instructions are expected to be forthcoming.
Based on the loan amount that is ultimately forgiven, this would result in a gain which the business would present in a financial statement as a separate line item. Existing GAAP standards do not specify where in the income statement debt extinguishment gains should be presented; thus, there are various accounting methods available.
While we await formal guidance on how PPP borrowers should account for their loans and forgiveness, please don’t hesitate to reach out to the MFA Team with questions or for best practice guidance.
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